How Does Credit Card Settlement Affect Your Credit Score?By Kelly Gabriel
Credit card settlement is one form of credit card debt relief that might work for you if you’re one of thousands of Canadians who have ended up in debt because you faced a difficult time. As you look for ways to deal with your debts, you might start to wonder what happens to your credit score when you take advantage of programs to help you get out of your situation. When looking at debt relief options and solutions, keeping your credit score in mind is a good idea because you will want to work on rebuilding your credit rating once your debt problems have been resolved.
What is Credit Card Debt Settlement?
To make sure that we’re all on the same page, credit card debt settlement is when you offer to repay a portion of what you owe on your credit card, typically in a lump sum one-time payment, and the lender agrees to forgive or write off the remaining balance.
For instance, if you owe $15,000 on your credit card, but can only pay $8500, if this is acceptable to the lender (the credit card company) or collection agency, after they agree in writing to your settlement offer, you would pay the $8500 and they would write off the remaining $6500. Writing debt off is a form of debt forgiveness. The credit card account is closed once the settlement is fully processed.
What Happens to Your Credit Score When You Settle Your Credit Card Debts?
Your credit score is a number that goes up and down within a range. The purpose of a credit score is to help lenders decide if they should lend you money or not. If you have a bad credit rating, your score will be low. This signals to lenders that you are less likely to repay any money they lend you. If your score is high, it means that you are likely going to repay any money you borrow. Because a credit card debt settlement writes off a portion of what you owe, your credit score will go down because you didn’t fully repay all of the money you borrowed.
Debts ‘Settled’ is Better Than Debts ‘Unpaid’
Not paying all of your credit cards as agreed impacts your credit score negatively. A debt settlement can however, under specific circumstances, provide a somewhat positive notation on your credit report. When debts are listed in collections it means that payments have not been made as agreed for at least 6 months. This gives the debts an “unpaid” notation.
However, a debt settlement is a process by which you pay a portion of what you owe. Once a settlement has been fulfilled, as part of the agreement made with the creditors, you can request that they note that the debts have been “settled” rather than not paid. To a future lender, knowing that you made some payments is better than you making no payments and leaving a balance owing. This won’t improve your credit score by much in the short term, as time passes it will.
How Long Will a Debt Settlement Affect Your Credit Score?
How long a debt settlement affects your credit score depends on who negotiates the debt settlement with your creditors. If you negotiate the settlement yourself, or you pay to use the services of a for-profit company, the settlement notation will remain on your credit report for 6 years from the date your payment is processed. While it affects your score more in the early years, as you work to build up other good credit, over time it impacts your credit score less and less.
However, non-profit credit counselling agencies have special arrangements with the credit bureau companies whereby we can instruct that the settled debts be removed from your credit report 2 years from when your payment is processed. To learn more about how our debt settlement programs work, contact us for a free, confidential appointment with one of our Credit Counsellors. They can explain the program and see if it might be an option for your situation.
Is There a Debt Settlement Repayment Calculator?
Are you wondering if there’s such a thing as a debt settlement repayment calculator? Many people ask this because they want to know how much they would have to pay to settle their debts. While some advertising might make it sound like up to 80% of your debt could be forgiven, or written off, that is unfortunately the exception and not the rule. Debt settlement arrangements are specific to someone’s individual circumstances, and creditors expect someone to pay as much as they can.
Should You Settle Credit Card Debt? Contact Us for Help & Information
So this begs the question, should you settle credit card debt? The answer is, it depends. Credit card settlement is one form of debt relief; there are, however, a number of other options and solutions to consider before you decide that a settlement is right for you and your long term financial goals.
Contact us to find out about settlements, debt repayment programs, and alternatives to bankruptcy. Through our anonymous online chat or email we’re available to answer your questions and provide guidance and information to help you make an informed decision about how to best handle your situation. Or book a free, confidential appointment with a professional credit counsellor to review all of your options in detail by calling us toll-free. You will sleep better and eliminate your worry knowing you have a plan to deal with your debts.